You are here

“Rupee’s depreciated again! uff, this government’s going to take the country down!” I have heard people say the aforementioned sentence so many times. It doesn’t matter if you don’t have a foreign trip planned or are not in the import sector. Depreciation in the rupee translates into hatred for the government. But what does a slipping, downwards skidding rupee mean for the aam janta? How does it affect you? Is there a good side to it? Let’s put on the economists tattered hat and explore:

1. Price of imported goods goes up, supply goes down and then the price goes up and supply down: Woah! A cycle!

Simply put, the imported shampoo you used to use and show off in front of your friends about will cost more rupees when depreciation hits. To understand it better, consider the following hypothetical example:

Let Mr. Retailer (the guy whom you bought the shampoo from) buy the shampoo from Mr. Importer at a price of Rs.6000 per bottle (who buys in bulk from America). Let Mr. Importer buy 100 of these shampoos at a price of $100 each and let one dollar be equal to Rs.50. Thus, in effect he pays Rs.5000 for each shampoo. Let’s depreciate the rupee now. Let one dollar now buy 55 rupees. Which means a sad Mr. Importer will have to buy each shampoo for Rs.5500. Mr. Importer is poor and cannot afford to spend more. Let’s say he has a fixed budget of Rs.500000 (enough to buy 100 bottles before depreciation, not so much now).

Now what will Mr. Importer do? He can only buy 90 shampoos. He then sells these 90 shampoos to Mr. Retailer for Rs.6500 per bottle. Mr. Retailer, who used to sell you the shampoo for Rs.7000, now will sell it for Rs.7500. Giving your hair that extra bounce will cost you a fortune. This is not the worst that could happen though. The worst is when Mr. Retailer realizes there is shortage of this shampoo in the Indian market and demands an unreasonably high price and may sell it in black. You and your poor hair are now in a dilemma.

Thus, depreciation can cause a vicious cycle if the rupee slides continuously. The worst hit sectors are where the Indian government imports a lot, for example the Oil sector. Just replace Mr. Retailer with petrol pumps, Mr. Importer with the Indian government, a bottle of shampoo with a barrel of oil, multiply the price by a few numbers and quantity by a few millions. Go figure!

2. Indian firms suffer, a lot!

This consequence really follows from the above, but is worth a special note. Not only do consumers buy imported goods, so do firms. Firms buy imported machinery from abroad to make the final product. Healthcare industries especially require specialized machinery that may not be manufactured in India.

How will everybody’s pearly white teeth be processed, if dentist’s stop buying that creepy machine that drills your teeth? Or how will Vicco turmeric be manufactured, if the machine that puts caps on the cream tube becomes expensive? The industries take the route everyone usually takes in such a scenario. Pass the cost on to the consumer while buying the machines anyway. This means that the price of the desi shampoo you were contemplating buying instead of the foreign one has also now increased.

Shiny hair seem like a luxury now, don’t they?

3. The baap of all depreciation consequences: Inflation

Inflation: the rise in the price of aloo, tamatar, gobhi, pens, paper, college fees, car, petrol, samosa, chai, toilet cleaners, etc. You name it. It’s the rise in aggregate (price of all things combined on an average) price level. In a country like ours, where the prices were rising already, the above reasons can make the price rise problem even worse. It may lead to most terrifying situation that makes all economists shudder with fear and gasp; Hyper inflation. In this situation, the prices rise to such an extent that it becomes virtually impossible to afford anything. An extreme case would be when a Vicco turmeric tube will cost ten thousand rupees (and yes it does happen, Google Zimbabwe and Argentina Hyper inflation)

Silver lining Eco-Book: Anyone!?

Silver lining exists in every dark cloud. In economics, if it doesn’t, we assume away and simplify everything till a silver lining appears! Luckily, we won’t be doing much assuming here. Let’s look at the bright side:

Well, this won’t affect you directly unless you are in the export industry and export Aam Churan to the foreign market. Let’s suppose there has been a steady market for Pappuji ka Aam Churan (PKAC) in the US Market (it could be possible, consumers have been proved to behave in an unpredictable fashion). Now, Pappuji sells one packet of our desi made PKAC at $10. Let’s also assume that Pappuji gets a demand of 1000 PKAC (it’s a new firm, cut our Paps some slack) per month from the US Market. So he makes $10000 in a month. Let the initial rate of exchange be $1 equal to 50 rupees. Now, Paps can’t use dollars in the Indian market, where there are rupee prices (Duh!). So Paps, goes to his bank and gets Rs. 5, 00,000 per month in accordance with our assumption. Let $1 now cost Rs. 55. Paps now gets a whooping 5, 50,000 rupees per month. This also means he can invest more money into making more aam churan and produce more on a monthly basis.

More production means more mangoes bought, more machines bought to make aam churan and more people hired to pack this precious commodity. The mango farmer sees the demand for mangoes rise, the machine maker makes more machines and people see a rise in employment. This is the backward linkage of a productive economic activity. Not only has he helped the world savour world-class aam churan, but has also helped the economy by just doing good business. Can you imagine the happiness on Paps face?

Who are the real Paps? Paps for the Indian economy are the minerals, jewellery, cotton, iron, steel, copper, electronics etc. These are all booming right now.

So which effect wins? The negative or the positive? If it isn’t evident; it’s the negative one. Simply because the dollars we get from exports are paid for the after depreciation expensive imports, as pointed above.

So, it is evident that Indian economy and the people in it are in a rotten economic soup. The only thing we can do right now is pretend all is cool, buy the imported shampoo and show off. Don’t let the price rise deter you. After all, our Reserve Bank isn’t just sitting on its precious butt and doing nothing. Let’s hold our breath and wait for the prices to fall, for there is change slowly but surely.